By Johan Ahlander and Johan Sennero

STOCKHOLM (Reuters) - Sweden's center-right government bet on a new round of income tax cuts in its 2014 budget on Wednesday as it sought to win a third term in office in elections next year.

The ruling four-party Alliance came to power in 2006 promising to shore-up Sweden's welfare model by encouraging more people to work, mainly through income tax cuts. They touted the same promises in 2010, when they were returned to power.

But three years on, unemployment remains high, the economy is still sluggish and the government is lagging in the polls.

The budget package of income tax cuts for workers, tax relief for pensioners and other measures including boosting youth employment will cost around 24 billion Swedish crowns ($3.71 billion) next year, with fiscal stimulus needed because the economy remains weak, Finance Minister Anders Borg said.

"Sweden is in a position of strength that allows fiscal policy to support measures for growth and jobs to prevent unemployment from becoming entrenched," Borg said in a statement.

Government debt, at around 36 percent of GDP, is among the lowest of major countries in Europe.

The government said it expected the economy to expand 1.2 percent this year before accelerating to grow 2.5 percent in 2014. The forecasts were unchanged from previous estimates although Borg said there were risks they would prove lower.

Gross domestic product rose by 0.7 percent in 2012.

TRUMP

The government hopes a fifth round of income tax cuts will be the trump card in the election, due by September 2014.

"The budget is an attempt to make taxes ... one of the main themes of the election," said Peter Esaiasson, professor of political science at Gothenburg University.

"More than anything, its a way to try and make the Social Democrats look like they are a party of tax hikes."

With polls in September showing the Alliance with the support of around 39 percent of voters and the opposition bloc , led by the left of center Social Democrats, at 49 percent, voters appear more concerned with other issues.

Unemployment is expected to average around 8 percent this year - higher than the 7.1 percent registered in 2006 - and Swedes are suspicious of further cuts to the welfare state in the wake of scandals over private care homes for the elderly and for-profit schools.

The major measures in the budget were already known. The income tax cut costs around 12 billion Swedish crowns ($1.85 billion) and a hike in the threshold at which wage-earners are liable for state income tax another 3 billion.

There was a 2.5 billion crown tax cut for pensioners, similar-sized measures to cut unemployment insurance costs and get more young people in to the job market and a boost to teachers' wages.

The state budget watchdog has said the budget measures will mean government would have to raise taxes ahead if it is to achieve its target of a 1 percent surplus in public finances over a business cycle.

($1 = 6.4903 Swedish crowns)

(Reporting by Simon Johnson; editing by Patrick Graham)

 

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